Analysis by Keith Rankin.
A commentary from Melbourne – Megan Gold, Melbourne embraced zero-Covid, now isolated as world bounces back, NZ Herald 16 Oct, originally published in the UK Daily Telegraph – notes that “even high vaccine uptake may not protect the most vulnerable from Covid; let alone the other illnesses that could ravage Australia due to the ‘immunity debt’ caused by much lower exposure to other viruses”.
‘Immunity debt‘ is a prescient conceptualisation of the cost-concept that I also have been writing about. I have written about ‘viral virginity’, ‘community respiratory virus immunity’, and being ‘naïve’ to viruses.
Before discussing debt in this context, it is useful to take stock of what debt means, both in its essential financial context, and in broader contexts.
In its simplest form, debt is a contract (or promise or obligation) between a debtor party and a creditor party. The debtor owes a debt, and the creditor owns the debt (as an asset). The parties may be individuals, collectives, or sectors of ‘the economy’. The debtor promises to ‘service’ the creditor, typically over a period of time.
The simplest financial debt is simply for a debtor to borrow something from a creditor at the beginning of a contractual period, and to repay the same (or some other specified thing) in the future in accordance with an agreed terms of contract. Sometimes such terms might be ‘implicit’. In Māori, the settlement of a debt is called ‘utu’; and the creditor may extract utu if the explicit or implicit terms of the contract are not met by the debtor. In literature, one of the most famous examples of utu is the ‘pound of flesh’ provision in Shakespeare’s Merchant of Venice.
Five Memes for Financial Debt (excuse the masculine pronouns):
Meme One. The simple example that forms the basic assumptions of the finance industry works like this. Two villagers – A and B – have different consumption inclinations. While both favour present consumption over future consumption, A favours present consumption more than B. So B makes available (‘lends’) some of his present entitlement to A; as a result A is contractually in debt to B. A will service his debt to B, on terms agreed to.
It is clearly understood by the financially literate among us that B will require compensation for his sacrifice of present consumption; compensation over and above repayment. That contractual compensation is called interest.
The innate preference for certain present enjoyment over uncertain future enjoyment means that both villagers ‘discount’ the future. In the very simplest case, A and B have close to the same discount rate (ie close to the same preference for the present over the future), and the interest rate for the loan will equal that discount rate. As a result of the loan, A gets more enjoyment than B in the present. B gets more enjoyment than A in the future. In total, B gets more enjoyment than A. A pays for his extra present consumption by giving up some future consumption; B pays by waiting.
A common way for A to service his debt to B would be through regular small future payments to B; those payments compensate B for the one big present payment B made to A. In essence, A and B do a trade; an ‘inter-temporal trade’ because A trades a present benefit for a future cost, and B trades a future benefit for a present cost.
This example has no ‘power play’, or ‘asymmetry’ as financial academics call it. B does not enter the contract in a privileged position.
In a debt-market with many village ‘players’, the different villagers’ discount rates will average out, creating a ‘market’ with a market rate of interest that averages out the different personal discount rates of the villagers. Those villagers with lower (below average) personal discount rates will tend to be lenders (like B), and those with higher discount rates will be borrowers (like A). As with all free and symmetric markets, the outcome is ‘win-win’, meaning that everybody gets a good deal. Nobody is a victim.
In this view, the differences in persons’ discount rates is due to their different temperaments; some people are believed to be more able (or willing) than others to forgo present pleasure in favour of future pleasure. Indeed, western communities – as cultural collectives – generally applaud creditors more than debtors. Of course, however, neither creditors nor debtors can exist without the other. B depends on A, as much as A depends on B.
We also should note that there is always a possibility of a contractual default. The simplest rule for a default would be that the contract terminates in the event of the death of A or B. In some periods in the past, other instances of default have been ‘managed’ through the use of debtor prisons.
The financial industry, which emphasises the understanding of debt contracts as inter-temporal exchanges, is principally in the business of providing services to creditors; to owners rather than owers of debt. ‘Thrifty and virtuous’ creditors are portrayed – through Meme One – as akin to squirrels accumulating interest-bearing magic-nuts. The abstemious puritan burgher is a role-model for ‘passive thrift’; a meme which in reality fosters a sense of ‘financial entitlement’, that good things necessarily come to those who wait. (Any reading of the history of capitalism in the century 1840 to 1940 would soon uncover the French-originating English word ‘rentier’, which serves as a contrast for that other French-English word ‘entrepreneur’. Today we use the word ‘investor’, as an incorrect substitute for rentier. [One apocryphal story is that Ronald Reagan lambasted the French for not having a word for ‘entrepreneur’.])
Meme Two. One very important sociological view of debt is that of an asymmetric contract, whereby A is in some respect ‘desperate’ for present consumption (eg, is starving), and B thereby has the power to control the terms of the contract to his advantage. This is a case of exploitation.
The most obvious reasons for asymmetry are differences in personal incomes (given that persons’ incomes represents their present consumption entitlements). Generally, it is easier for a person with a high present entitlement (ie high income) to forego some of his current pleasure allocation than it is for a person with a low present entitlement; so a high-income person typically has a lower discount rate than a low-income person.
One important feature of financial-asymmetry, then, is if a prospective debtor A has a very high personal discount rate (eg, his very survival depends on increased present consumption), and creditor B has a very low (probably negative) discount rate (eg he is very rich, would struggle to spend all his income in the present, and thereby favours future consumption over present consumption).
A person with a power-advantage – in this case creditor B – would be able to skew the contract in his favour. The interest rate may be set high; that is, at A’s high discount rate. Further the contract may include ‘flexibility’ terms which, for example, give B the right to adjust the interest rates. And B may be better able to set a default protocol, such as transferring the debt to a relative of A, or being able to take possession of items of A’s property.
The result may be a win-draw contract; B wins, while A is only marginally better off. Or, given the very high rates for which these kinds of debtor discount the future in favour of the present, these flexible (open-ended) debt contracts are best described as exploitative win-lose deals, with the debtor – facing additional unanticipated costs – becoming the inevitable loser.
(Sometimes these contracts can even be best described as lose-lose deals, because creditors are not necessarily winners. While the debt-contract in The Merchant of Venice falls into the Meme Four category – below – it can be understood as a case which had a lose-lose outcome. [A lose-lose deal – distinct from a lose-lose outcome – exists when unaccounted-for costs fall on both parties, and that such costs were always more likely than unaccounted-for benefits.] While no party to a deal ever intends to lose, loses may come to either party – or both – if pertinent information is ignored.) Also, unexpected inflation may turn the tables on creditors; unexpected deflation may aggravate the pain of debtors.
The important point here is that debt is popularly understood as an earthly purgatory suffered as a consequence of an initial gratification; and that the purgatorial nature of debt is understood to be so without any necessary reference to whoever might own that debt. (We may note that, in criminal courts, a guilty prisoner is in debt to a victim; but the victim tends to be sidelined, with the state taking over as the legal creditor. The procedural emphasis is on the debt of the criminal, and the subsequent purgatory that a convicted criminal must face; compensation for the victim creditor is not the focus of the process.)
Credit card debts largely takes this form. Although the high interest rates recompense the creditors for the possibility of uncompensated default through bankruptcy, these are cases of open-ended debt-contracts whereby the creditor party has some flexibility to adjust the contract to forestall bankruptcy.
The term ‘usury’ is particularly applicable to asymmetric debt contracts, where the charging of interest may represent extortion under the guise of risk management.
Memes three and four are a reflection of debt from an economist’s point of view.
Meme Three. One well-known example of this meme is hire-purchase, which continues to be a main method through which a consumer finances the purchase of a car. The best-known example of this meme, however, is a ‘home-loan’ or ‘mortgage’. (The ‘home-loan’ example has been complicated by economists, through the fact that the ‘national accounts’ formally treat home loans as business loans. This interpretation is not really tenable, however, for an owner-occupied apartment; the financing of such an apartment is really quite comparable to the financing of a car.) Home purchases with mortgages are, essentially, secured consumer debt.
In this case, the creditor (‘mortgagee’) trades a present cost for a future benefit; a benefit which we may call ‘profit’. The debtor (‘mortgagor’), on the other hand, incurs a future benefit coincident with a lesser future cost. In the case of home loans in New Zealand, the future cost is variable, alterable at the behest of the creditor. (Further, the possibility of unexpected inflation or deflation – inflation or deflation rates different from those built into the mortgage contract – may amend the creditor’s benefit or the debtor’s cost.) In the case of loans contracted through professional intermediaries – such as banks – the creditors are their depositors or any other party appearing on the liability side of their balance sheets.
Where a debtor’s benefit is in the future rather than in the present, the contract becomes an economic investment. An investment, by definition, represents an expected win-win outcome; the creditor gets to share in the gains that formally accrue to the debtor.
Under this meme, while debt cannot be regarded in any sense as a ‘problem’, we understand that the future by definition is not able to be fully predicted, so a creditor or a debtor (or both) might not achieve their anticipated gains. Or one or both may achieve gains that exceed expectations.
Meme Four. This category of debt is that of a classic business investment. It is largely unsecured debt (servicing depends on future revenue), and is the essence of the way economists understand debt, and is intrinsically linked to the concepts of economic investment and economic growth. Unlike the previous category, these debt contracts are highly sensitive to interest rates. (This is why, when interest rates increase, bank lending tends to switch from the Meme Four type – this type – towards the Meme Three type.)
In this case, the debtors, by expanding their businesses, expect a net profit gain. The debt funds new machinery, premises, and labour upskilling. The resulting income stream – to the businesses’ shareholders – is expected (by debtors and creditor alike) to exceed the debt-service cost.
Again, as in Meme Three, such debt contracts are the antithesis of a problem; they represent the essence of a thriving economy. Nevertheless, any particular contract can go ‘pear-shaped’, as in the example of The Merchant of Venice. This is because the two things that most characterise these contracts are risk and uncertainty. The difference is that risk is calculable by actuaries (known unknowns), whereas the probability of uncertain outcomes is not calculable (being either ‘unknown unknowns’ or ‘black swan’ events). Banks and other lenders manage actuarial risk through calculation and through pooling (spreading risk). While uncertainty – unlike risk – is problematic to the finance sector, uncertainty is actually an essential component of dynamic economic change; an important lesson from history is the importance of serendipity frequently prevailing over catastrophe.
As we will see, ‘immunity debt’ is a black swan consequence to which most societies apply ‘wilful ignorance’. Any other way of approaching this issue of wilful unknown unknowns is bureaucratically ‘too hard’, and would require a person or an authority to acknowledge a possible truth from which they would rather hide. Black Swans, while ‘unknown unknowns’ to the ‘need-to-knows’, represent ‘known unknowns’ to the Cassandras (such as the abovementioned Megan Gold) among us.
Entrepreneurial debts fall into this Meme Four debt category; indeed, in The Merchant of Venice, the protagonist debtor (Antonio) was a venturer entrepreneur who lost a fleet of ships in a storm, and was thereby unable to fulfill his contract with Shylock. (There is a reason why the words ‘venture’ and ‘adventure’ are so similar; and they connect to the Latin verb ‘to sell’.)
Meme Five. Government debt represents a particularly problematic source of societal hand-wringing. In particular, government debt is an issue which splits the economics profession. Many economists are employed by financial institutions. Further, one large branch of the economics profession – the ‘neoclassical school’ – tends to take a ‘neoliberal’ normative view of capitalism; a view that sees governments and certain other collectives as impediments to (rather than agents of) societal economic success.
As such, these economists, while ‘pro-debt’ (as all economists are, as per Meme Four) are ‘anti-government’, or at least they favour ‘small government’. The result is that government debts – regardless of who the creditors might be – are painted in accordance with the Meme Two view; that is, debt being a kind of purgatory. (We might note that one particular dictator in the 1970s and 1980s obsessed about ending his country’s public debt; indeed he, like no other, succeeded in repaying his country’s government debt. See this 17 Oct NZ Herald story – Smoking plane and the ‘spy’ who followed the All Blacks through Romania – about life in Nicolae Ceaușescu’s Romania in 1981, a country in the 1980s about as close to ‘hell on earth’ as any country ever could be.)
The neoliberal viewpoint is predicated on the view that governments are at best inefficient, and at worst highly corrupt, and that ‘bad debt’ incurred by governments ‘crowds out’ what would be otherwise good debt contracted by productive businesses.
Some governments – and New Zealand’s government seems to be one of these – are so committed to ‘financial probity’ (the avoidance of public debt purgatory) that they will refuse to facilitate many of the investments that non-neoliberal economists understand as being essential to the economic well-being of a society.
The tendency when discussing government debt, and regardless of the interest rates applying to that debt, is to ignore the creditor party. While ignoring the creditor is a complete nonsense when discussing financial debt (consider Meme One and Meme Two), the tendency to do so, nevertheless, leads to a concept of community debt purgatory for which there is no explicit creditor.
With essentially financial debts in mind, we can transfer the predominant ‘purgatory’ meme (Meme Two) to a social context. Thus, any societal – ie political – choice made that is seen to exchange a present gain for a purgatorial future creates a community debt. In this situation, the essentially financial role of the creditor is lost from the discussion. Community debt can be understood as the ongoing costs incurred from a community decision – advertent or inadvertent – that prioritised the present over the future. Community – or societal – debt thus arises, not so much from the presence of investment (Meme Four debt) but from the absence of investment; that is, community debt arises from the absence of Meme Five public debt.
Abstention from incurring government financial debt can also be understood as an avoidance of collective investment, and thereby the creation (rather than the eschewal) of community debts. It is these community debts – too much saving and too little investment – that young people end up having to pay for.
An interesting example in the literature of the merchant capitalist era is the Dr Faustus story, a story of an alchemist popularised as a sixteenth century drama by Christopher Marlowe, and (as ‘Faust’) both a play and an opera inspired by the early nineteenth century Industrial Revolution.
The ‘diabolical’ Faustian bargain is represented as a fork in the road of history; a road between two future social choices, both of which can be represented as either beneficial or as detrimental. In particular, the industrial future (from the standpoint of 1850) is painted as a kind of indefinite purgatory; a purgatory with consumerist pleasures that eventually (and episodically) give way to unsustainable crises of pollution and pestilence.
The community debt discourse that has dominated the twentyfirst century is that of climate change. Added to that, we now have the pestilence of Covid19, which comes with the ‘black swan’ of immunity debt.
Immunity debt can be understood as a future health cost; or, if you prefer, a loss of future benefits. The context is the Covid19 pandemic. The debtor is a community; each community affected. In the article by Megan Gold, the debtor party is a collective; the ‘people of Melbourne, Australia’. To place this in context, we could consider an alternative contract, where the debtor party is the ‘people of Stockholm, Sweden’. In my context here, the debtor party is the people of Aotearoa New Zealand (AoNZ).
Who/what is/are the creditors? Let’s start by considering the creditor as the Covid19 virus. This is a simple but ‘clever’ living species which ‘wants’ to ‘survive and prosper’. And it does so by ‘borrowing’ and enjoying human lungs. We extract payment by refusing it access to our lungs; by making it work hard, by denying the virus future enjoyment. So, in this relationship, we may be creditors, with the virus is the debtor. Remember, a debtor enjoys substantial immediate benefits in exchange for a loss of future benefits.
More pertinently, and because we do not consider the welfare of a virus, we think of Covid19 as a trickster; not unlike Loki, the Norse God. (And not unlike the proposer of the Faustian bargain.) So, we come to see ourselves as being in debt to – or beholden to – the Covid19 virus. Much as we might consider ourselves beholden to a con-artist.
In another view, the creditor in this case may be regarded as the alternative ‘us’. Just as with internal government debt, we ‘the people’ are both creditor and debtor. The credit is the immediate benefit of the policy pursued. The debt is the future cost of that policy. (If in fact we wished to emphasise the immediate cost of the policy, and its future benefits, we would regard the policy choice made as an investment rather than as a debt.)
While there are a variety of alternative policy responses that could have been pursued, the appropriate counterfactual is the one of a minimalist government response, such as that of Sweden. Which policy choice incurred the bigger community debt? Which choice delivered a higher rate of return? (New Zealand policy announcements today accentuate New Zealand’s position of having made a diametrically opposite choice from that made in Sweden.)
Seen from a debtor point of view (and with 2020 being considered ‘the present’), the contract is present gain in return for future pain (with ‘future’ potentially beginning in 2021). The higher the discount rate, the higher the future pain. Did the New Zealand government intentionally trade 2020 gain for post-2021 pain? That’s a rhetorical question.
The 2020 gain in AoNZ was considerable. In the 12 months beginning March 2020, New Zealanders clearly gained substantially, relative to, say, the Sweden counterfactual. (There are exceptions: while some New Zealanders would have been worse of in that 12-month period than their Swedish counterparts, most were clearly better off.)
The future pain (from mid-2021) clearly puts New Zealand worse off than Sweden. So far in the 2021 period, excess deaths in New Zealand and Sweden have been similarly negative. Though, in other measures, those Swedes who survived 2020 have lived reasonably normally, while New Zealanders have not. So far, the ‘purgatory’ in New Zealand has largely taken the form of restrictions and vaccinations that show no sign of coming to an end. Sweden may have come out of its purgatory, though I expect it will pursue a revaccination strategy.
At the time that the key covid policy choices were made, the discount rate associated with New Zealand’s policy choice seemed quite low. (Indeed, at the time some thought the policy discount rate was negative; negative interest rate contracts see debtors gaining both present and future benefits [not incurring costs at all], with creditors making smaller present and future losses than they would otherwise expect to make. We might note that, with hindsight, people in New Zealand who bought houses in the 1960s, late 1970s enjoyed negative discount rates; ie, negative real interest rates.)
From August 2021, however, we see that resident New Zealanders have started to service the community debt associated with the policy choice made. The problem is that nobody has any idea at what date the debt contract matures (ie when purgatory ends), and community debtors find themselves subject to floating interest/discount rates. The ‘goal-posts’ keep shifting.
One of the biggest problems – one that New Zealanders are only just starting to see – is that the ‘immunity debt’ may be more than a vulnerability to Covid19. This is like a floating debt that policymakers took no account of in March 2020, and which still, by and large, they have not taken account of (it was a possibility in the small print; the print that nobody read). We do not know the size of this extra debt, or how long (if ever) it will take for us to settle this debt. But it could be very large, meaning that the true discount rate for the New Zealand policy is starting to look very high. [On RNZ’s Nine-to-Noon today, Business, health and Covid modelling analysis of new Covid traffic-light system, Professor Michael Baker said that he is expecting influenza to be problematic in the winter of 2022.]
The immunity debt incurred in 2020 comes in three parts. And, with hindsight, New Zealand seems to be facing a significantly higher immunity debt than does Sweden.
The first part is lost immunity specific to Covid19. We try to service this debt through mass vaccination, understanding that New Zealanders need to be more vaccinated that they would have had they chosen the Swedish counterfactual. We also understand that this most likely includes the cost of regular revaccinations – refer Dr Ashley Bloomfield: Nationwide Super Saturday Vaxathon kicks off (RNZ, 16 Oct); so far this has been poorly communicated in most countries, and some strategic workers in New Zealand are now approaching six months from their most recent vaccination shots, and with little guidance so far about how revaccination would be prioritised within the new ‘traffic-light’ policy.
The second part of the immunity debt is the loss of population immunity to other viruses. My sense is that this policy choice has opened the door to an influenza pandemic within 20 years. We already know that unusually large numbers of New Zealand infants and children were hospitalised in 2021 due to respiratory infections that they used to be much more immune towards. Then there are the past childhood illnesses that we had thought we had vaccinated away; refer Revealed – health authorities’ warnings that falling vaccine rates are putting Māori and Pacific children at risk, NZ Herald, 21 Oct. What we do know, informally, is that regular day-to-day immunity to ‘common cold’ type viruses is maintained by repeated exposure to those viruses; and that we have no idea how serious these viruses can become because of that exposure being impeded, and what impact this will have on population life expectancy.
The third part comes in essentially economic costs: food inflation, disrupted livelihoods, thwarted aspirations, and reduced access to the other fundamentals of life (including timely treatment for non-covid health conditions). While the size of this ongoing debt-service cannot be known, it will most likely contribute further to reduced life expectancy. Indeed, we may expect immunity debt to be paid in reduced average life expectancy.
With open-ended debt contracts – floating-rate rather than fixed-rate contracts – the final effective rate of interest can only be calculated when the debt is settled. In the case of immunity debt arising from lost protection from otherwise endemic diseases, the debt is settled when a new normal prevails. My sense is that the extent to which life-expectancy decreases as a result of a net loss of immunity to disease would be measure of the debt-service price for the immunity community debt that our choices have unintentionally contracted. That, of course, would have to be contrasted with any ‘new normal’ loss of life expectancy that would have occurred as a result of a different policy choice. A degree of immunity debt might yet be a price worth paying.
Of course, immunity debt can be mitigated to some extent, if acknowledged. I would like to see, for the foreseeable future, both Covid19 and influenza vaccination becoming mandatory. An influenza pandemic could hit at any time; a society with immunity debt will be woefully unprepared for it.
Debt Peonage to Covid19?
Finally, there is the price we pay to protect ourselves from severe Covid19 ilness, regardless of the immunity debt and other prices we pay for the disruptive lockdowns and associated paraphernalia.
I will quote New Zealand epidemiologist Rod Jackson verbatim, from Epidemiologist concerned traffic light system would be too rigid (RNZ, 19 Oct):
“For the [fully-vaccinated] rest of us, we are all going to get Covid; now this is something that people don’t realise, but it will be a mild disease because we’ve been vaccinated, so covid will be like a booster to our vaccination. … In Singapore they are trying to manage the spread of covid through the vaccinated population.”
I don’t think that the New Zealand public has been told that, in the view of some epidemiologists, the game plan is [or some think it should be] to give ‘everyone’ two vaccinations plus at least one dose of Covid19. Dr Jackson clearly believes that even people multiply-vaccinated against Covid19 will still get the disease, albeit as an uncommon cold.
By contrast, if we believe one group of experts, including the same Rod Jackson, the Covid19 virus – SARS-Cov2 – will, if not eliminated globally, become one of the worst circulating viruses that we will have to contend with. (Refer: Why we must not allow virus to become endemic in New Zealand, Asia-Pacific Report, 13 Oct; also NZ Herald, 11 Oct, originally from The Conversation.) Uncommon cold, indeed.
Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.